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Debt is unfortunately something that is extremely common and accepted as normal in our society. We’re encouraged to take out credit cards to build our credit scores and we’re bombarded with “buy now, pay later” messages all the time: why wait when can have what we want NOW? We take out loans to go to university, to buy houses, cars, furniture – you name it, we can usually get credit for it. It means we don’t have to go through the discomfort of delayed gratification like our grandparents and parents needed to – the first credit card only came to the UK in 1966!!
So we get our first credit card (for me, it was when I turned 18 and was given one with my student account) and in an ideal world, we would be taught to pay it off in full every month, but what if that isn’t possible, or we choose not to? The debt then builds and we end up in a big fat mess – much to the bank’s delight.
I know that some people rely on their credit cards in order to make ends meet every month, and particularly now in times of hardship. They are useful, but relying on them all the time is actually very very difficult to uncouple from in the long term because it becomes a financial crutch.
I used to think that all debt was bad, and beat myself up for getting into so much debt growing up. But actually, I’ve come to understand that debt really isn’t so black and white and there are helpful uses for having it (as well as the not so helpful!).
Good Debt Vs. Bad Debt
Now, as I see it, debt isn’t really good or bad, it’s the meaning we give it and the things we buy with it that counts. But for simplicity’s sake, let’s assume for a bit that there is a “good” type and a “bad” type.
Bad debt is all around us. We are encouraged to “buy the thing now” rather than wait; just listen to radio adverts for buying cars, or furniture – there will be elements of “have now, pay later” within them. Bad debt is when you’re using debt to buy things that don’t add any value to your net worth – items that COST you money rather than MAKE you money.
Even if you’re using debt to fund the wedding of your dreams, or a new car, none of it will improve your net worth so cannot be seen as a worthy use of credit no matter how amazing the day or gorgeous the car.
But what about if you use debt for a house purchase, university, investing in property or stocks and shares or on a training course to fund a new career aspiration?
I’d say that these are very good uses of debt. By using debt for this, you’re using other people’s money (OPM) to improve your life and build assets, and by doing so, improve your net worth. Now of course there are no guarantees, and if you plan to use OPM for investing, make sure you understand FULLY what you’re doing before getting involved.
From now on though, I am going to focus on getting out of “bad” debt – store cards, credit cards, furniture purchases etc and how you can stay out of it FOR GOOD.
What To Do First
Before embarking on any kind of debt blitzing program, you will need to get some fundamental things straight. You will definitely need to know how much money you owe, who you owe money to, and what the minimum payments and interest rates are for each one. This includes family members who have leant money to you – make sure you clean up your money karma!
This may require making some phonecalls and opening scary looking letters (I’ve been there and I know how that feels – I recommend wine for this bit).
The next thing you need to be look at is your spending, and I’m afraid that this involves having a budget! You will need to allocate a small amount of money extra towards paying off debt in addition to paying all the minimums, PLUS extra to start creating an emergency fund.
I won’t lie – this may require some sacrifice (but not forever I PROMISE!!).
The reason for building an emergency fund is so that you don’t fall back into debt again in the future. You don’t want to do all this amazing work only to then need to use a credit card to get your car fixed when the tyres pop.
So now you’ve done a few basics, let’s dive into the debt-paying-off systems!
The Debt Snowball
I will summarise this method for you now, but if you want more detail, I highly recommend that you download my debt-freebie e-book here.
Remember that I told you to list out all your debts? Now put them into smallest to biggest order in terms of their overall value (not interest rate). The objective is to continue to pay off all of the minimum payments, but add in a little extra to the SMALLEST debt you have.
Once the smallest one is paid off, do a little dance and celebrate it – I’m serious! Then add what you were paying on this debt to the next smallest. Now you have two minimum payments plus your little extra amount going towards this one – hurrah!
Rinse and repeat until they’re all paid off.
Personally, this is my favourite method of paying off debt and is the one I used first on my debt destruction mission!
The Debt Avalanche
This is very similar to the debt snowball, but in this scenario you are putting the debts into order of highest interest rate first. This is meant to save you the most money in terms of interest, so finance nerds like this one, but I think it can be the hardest method to actually implement – your biggest debt may have the biggest interest rate, and it means the celebratory dance will take that much longer to get to.
Personally I like quick wins, but that’s just me!
It doesn’t matter which one you go for – it’s whatever works for you so that you actually stick to it and get the job done.
The Debt You Hate The Most
I picked this tip up from The Wealth Chef, and she talked about paying off the debt you hate the most first. This might be a debt related to an ex for example, and you feel sick and annoyed every time you pay it off – so get rid of it first, then employ the snowball or avalanche methods for the rest.
Debt consolidation is a handy thing you could do when you need to get a grip on all the monthly payments to make it easier for you to manage. It’s fast and highly effective, BUT does require that you add no more debt to the problem and cut up all your cards. If you do any of these methods and don’t address the root cause of WHY you were in debt in the first place, you’ll end up back there again.
Take out a loan
This is what I did when I changed jobs to re-train as a GP. I knew I would take a hefty pay-cut, so decided to ask the bank for help. To say I was nervous was an understatement!! I shouldn’t have been worried though – I spoke to a lovely woman in the bank about what was going on, and she authorised a loan to cover all my debts. I paid them all off, and now I have one lump sum to pay monthly that was £300 cheaper than when I had all the debts (and would have taken me the same length of time to pay off).
It reduced the amount of interest I was paying, and made it easier for me to manage my budget on a smaller income.
Take out a 0% credit card
This is the same as consolidating your debts with a loan, but using a 0% credit card instead. The money saving expert often provides up to date information on which cards are available, so do some research and find one that suits.
Make sure you work out how much you need to pay off per month in order to take full advantage of the 0% period (which could be 18 months or so) and completely clear the debt. However, bear in mind that you will be charged a fee for moving balances to the new card (the bank has to make money from you somewhere), and DO NOT be tempted to use the card for anything else. Cut it up or freeze it – manage all your accounts online to allow you to pay it off for good.
Take out a new mortgage
If you have a mortgage, you can speak to a broker to look at consolidating your debts into it providing you have enough equity. Yes it means paying your mortgage for much longer, the monthly payments may go up (but not necessarily), and like the 0% method, you absolutely must not get yourself back into debt again. Once the mortgage pays it off, stick to your good habits, put an emergency fund in place and avoid credit all together.
It’s not ideal, but it’s a method that can really help, very quickly.
What to do if you can’t do any of these things?
So you may have tried to get a 0% card or take out a loan but have been rejected for them, and if you don’t have a mortgage then obvsiously this isn’t helpful either.
If you’re in this situation and you can’t easily snowball because the payments are too much, then you need to get external help. This means approaching a debt-support charity, either in your local area or online. I will warn you though – if you google debt support charities, unfortunately there are companies out there who are masquerading as “help” but are not charities. They will offer you an easy “solution” that may not be in your best interest. Be careful where you click!
Debt is a drain on everything and prevents us from being able to create “real” wealth. And getting out of debt is only one part of the equation. Mastering your spending mindset is imperative (assuming you’re in debt due to overspending like I was). You also need to be building an emergency fund, have insurances in place (e.g. for income protection in the case of not being able to work through sickness for example), continue to budget and stay within your income means.
It’s not an easy road, and sometimes it feels like an impossible mission, but trust me, this is so worth it.
Keep up the fab work – you can do it!
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